Declining USD pushing gold prices to record highs

By Muhammad Zamir Assadi 

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The price of gold surged to historical highs of over $2450.00 per ounce in the second quarter of 2024, propelled by the accelerating decline of the US dollar.

The dollar's downward trajectory, fueled by the Federal Reserve's accommodative monetary policy, rising national debt, and growing inflation concerns, has prompted investors to seek refuge in safe-haven assets such as gold.

With its long-standing reputation as a bulwark against inflation, currency volatility, and geopolitical uncertainty, gold has emerged as a primary beneficiary of the dollar's decline. As the dollar's value continues to erode, gold's appeal grows, driving prices to unprecedented levels.

According to Bloomberg's monthly statistics, the US dollar has suffered a pronounced decline, shedding approximately 8-10% of its value in both real and nominal terms over the past year, largely attributable to the Federal Reserve's dovish stance on interest rates. This accommodative monetary policy has further eroded the dollar's strength, prompting a surge in investment in gold as investors seek safe-haven assets.

In addition to anticipated interest rate cuts and escalating geopolitical tensions, central banks have emerged as a significant force behind the surge in gold prices in 2023, a trend expected to persist in 2024. Led by China, central banks purchased a substantial 1,037 tonnes of gold in 2023, according to the World Gold Council.

The first quarter of 2024 has seen a robust continuation of this trend, with net purchases reaching 290 tonnes, marking the fourth strongest quarter since the buying spree began in 2022. Notably, this figure exceeds the quarterly pace implied by J.P. Morgan Research's annual estimate of 850 tonnes for 2024 by 36%.

Furthermore, the United States' burgeoning national debt poses a significant threat to the economy and the dollar's value. As the debt continues to climb, surpassing $35 trillion according to the Peter G. Peterson Foundation, investors are growing increasingly cautious. Waning confidence in the dollar may prompt investors to offload their holdings, triggering a decline in demand and subsequently depressing the currency's value.

The COVID-19 pandemic has had a profound impact on the dollar's value, as the global economic slowdown has reduced demand for the currency. Furthermore, the pandemic has accelerated the shift towards digital currencies and alternative assets, eroding the dollar's dominance.

As the dollar weakens withits value diminishing daily, concerns about inflation grow. A weaker dollar can lead to higher import costs and commodity prices, increased money supply, and reduced purchasing power. However, it may also enhance the competitiveness of US exports, potentially bolstering economic growth.